Theory Base of Accounting Test

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Theory Base of Accounting Test - 47

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Question 1
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According to the convention of conservatism, the stock in trade is valued at ______________.

A
Market price

B
Cost price

C
Market price or cost price whichever is higher

D
Market price or cost price whichever is lower

Solution

As per the conservatism Concept, the profit should be recorded in the books of accounts only when it is realised whereas all the expected losses should be recognised in the books of accounts.
Therefore, the stock in trade is valued at the Market price or cost price whichever is lower.
Question 2
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Playing safe policy is according to _________________.

A
Convention of conservatism

B
Convention of full disclosure

C
Convention of materiality

D
Convention of consistency

Solution

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe.
The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated.
The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
Question 3
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According to money measurement concept, which of the following will be recorded in the books of accounts?

A
Excellent Morale of workers

B
Quality control in the business

C
Managing liability of the Manager

D
Cost of the Machinery

Solution

The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts.
All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, do not find a place in the accounting records of a firm.
Hence, in the above case, only the cost of machinery will be recorded in the books of accounts.
Question 4
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Which is the accounting concept that requires the practice of crediting closing stock to the trading account?

A
Going concern concept

B
Maturing concept

C
Cost concept

D
Realization concept

Solution

Going Concern Concept is one of the fundamental accounting principles which states that the operations of the business will not be suspended in near future and the business will continue to run.
Therefore, the Going Concern Concept is the accounting concept that requires the practice of crediting closing stock to the trading account
Question 5
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Revenue is said to have been earned when ______________.

A
Sale is made

B
Cash is received

C
Goods are manufactured

D
When accounted for

Solution

As per revenue recognition, Revenue is said to have been earned only when the Sale is made.
Revenue recognition is a generally accepted accounting principle (GAAP) that explains about how and when revenue is to be recognized.
Question 6
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Contingent liability appears as a foot note in the balance sheet. This is in accordance with the accounting principle _____________.

A
Consistency

B
Disclosure

C
Conservation

D
Materiality

Solution

The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.
This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.
Question 7
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The policy of "anticipate no profits, but provide for all possible losses" are due to convention of ______________.

A
Consistency

B
disclosure

C
Materiality

D
Conservatism

Solution

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe.
The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated.
The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
Question 8
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The principle of treating business distinct from its owner is known as _________________.

A
Business Entity concept

B
The concept of consistency

C
The concept of conservatism

D
Dual aspect concept

Solution

The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner.
Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit).
Similarly, when the owner withdraws any money from the business for his personal expenses (drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business.
Question 9
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In trading account, closing stock is shown at cost price or net realization price whichever is lower. This is due application of ______________.

A
Convention of disclosure

B
Convention of materiality

C
Convention of consistency

D
Convention of conservatism

Solution

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe.
The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.

On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.
Question 10
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The various assets acquired by a concern or firm should be recorded on the basis of the actual amounts involved or spent. This is the assertion of ______________.

A
Money Measurment

B
Cost concept

C
Going Concern Concept

D
Dual Aspect Concept

Solution

The cost concept requires that, all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.

For example, an old plant was purchased for Rs. 50 lakh, which is into the business of manufacturing detergent powder. The following were the other expenses incurred for its installation:

1. Transporting the plant to the factory site- Rs. 10,000

2. Repairs for bringing the plant into running position- Rs. 15,000

3. Installation- Rs. 25,000

The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 50,50,000.

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Theory Base of Accounting Test - 47

Result

Theory Base of Accounting Test - 47

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SHARING IS CARING

Question 1

Market price

Cost price

Market price or cost price whichever is higher

Market price or cost price whichever is lower

Solution

Question 2

Convention of conservatism

Convention of full disclosure

Convention of materiality

Convention of consistency

Solution

Question 3

Excellent Morale of workers

Quality control in the business

Managing liability of the Manager

Cost of the Machinery

Solution

Question 4

Going concern concept

Maturing concept

Cost concept

Realization concept

Solution

Question 5

Sale is made

Cash is received

Goods are manufactured

When accounted for

Solution

Question 6

Consistency

Disclosure

Conservation

Materiality

Solution

Question 7

Consistency

disclosure

Materiality

Conservatism

Solution

Question 8

Business Entity concept

The concept of consistency

The concept of conservatism

Dual aspect concept

Solution

Question 9

Convention of disclosure

Convention of materiality

Convention of consistency

Convention of conservatism

Solution

Question 10

Money Measurment

Cost concept

Going Concern Concept

Dual Aspect Concept

Solution

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